Tax, investments and pension rules can change over time so the information below may not be current. This article was correct at the time of publishing, however, it may no longer reflect our views on this topic.

IAG's first quarter revenue fell 13% to EUR4.6bn and the group made an underlying operating loss of EUR535m, compared to a EUR135m profit in the same period last year.

IAG expects it to take "several years" for passenger demand to recover to 2019 levels, and is therefore restructuring the group. This will impact most British Airways employees, and could result in up to 12,000 redundancies. IAG has formally notified its trade unions.

The group will release more detailed first quarter results on 7 May as planned.

Our view

Airlines are a traditionally cyclical industry, and investors will be used to ups and downs. But current conditions are particularly challenging.

Coronavirus has hit airlines hard. Demand for flights has dropped substantially, although this is a bit of a moot point in the face of widespread travel restrictions. Worryingly, IAG thinks it will take "several years" for demand to recover to 2019 levels. If they're right, then many airlines will have significant excess capacity, and there's unlikely to be a buoyant market for unused planes. This is what's behind IAG's move to restructure, including laying off up to 12,000 employees.

In times like these investors will be thinking hard about the financial strength of the businesses they own. The two key metrics are therefore the amount of money going out the door, and the amount of liquid cash the group has to meet its obligations.

In 2019 IAG's total operating costs were EUR22.2bn before exceptional items, and we estimate cash costs were something in the region of EUR60m a day. Management will try to reduce these costs as much as possible, but we don't know how low they can get them yet. At the end of March, IAG had EUR 9.35bn in liquidity, of which EUR 6.95bn is cash and cash equivalents. This figure is probably already well out of date though, and we hope we'll get a more recent update on 7 May when the group next reports. The desire to preserve as much cash as possible is behind the group's decision to suspend the dividend.

In our opinion, IAG's significant liquidity puts it in a stronger position than some of its peers. The short term earnings hit has been very ugly though, and management expects it could get worse. If the disruption continues long enough even IAG's resources could reach their limit.

We don't know where this will end up, but the risk-reward profile of the airlines has been heightened dramatically by COVID-19. It is possible that some airlines will not make it through this degree of disruption, especially if it continues for an extended period of time. However, those that do make it could see their competitive position strengthened in the end.

Prior to the most recent update, IAG shares changed hands for 0.8 times book value, a more conservative way of valuing cyclical and asset-heavy businesses like airlines. However, it is possible that book value will be written down in the near future, so investors should be careful when using backward looking metrics in such a dynamic environment.

First quarter trading details

IAG's pre-tax profit was impacted by a EUR1.3bn exceptional charge for now ineffective fuel hedges. The group's operating result was in line with last year during the first two months of 2020, and most of the losses were incurred in March. British Airways was the biggest contributor to the losses, followed by Iberia and Aer Lingus. Vueling experienced only a minor increase in losses.

Capacity, as measured by available seat kilometres, fell 10.5% and the planes were on average 76.4% full, a decline of 4.3 percentage points. Passenger traffic in terms of revenue passenger kilometres declined by 15.2%.

IAG has reduced capacity by 94% for April and May, and is only operating passenger flights for essential travel and repatriation.

At the end of March IAG had EUR9.5bn in available liquidity, of which EUR6.95bn was cash or cash equivalents.

IAG is not giving detailed profit guidance, but expects losses in the second quarter to be "significantly worse" than those suffered in the first quarter.

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